In his review of the book - Unmaking China's Development: The Function and Credibility of Institutions by Peter Ho - Gordon Darroch concludes that the country's attempts to get its property industry in order will be felt far and wide.
The recent takeover of Anbang Insurance Group by the Chinese government has cast the spotlight on China’s idiosyncratic real estate market.
Anbang, whose European assets include Dutch insurer Vivat and the Doubletree by Hilton hotel in Amsterdam, has moved aggressively into foreign markets in recent years, acquiring high-profile properties such as New York’s Waldorf Astoria hotel in 2014 for $2 bn (€1.6 bn).
Analysts expect such big outlays to be curbed in the wake of the government’s decision to seize control of the giant insurer for a year and charge its founder and chairman, Wu Xiaohui, for economic crimes including fundraising fraud and abusing his position.
According to Peter Ho, a professor at Tsinghua University and the London School of Economics, the move reflects a determination by the authorities to crack down on corruption and prevent China’s enormous property bubble bursting and triggering a major economic crisis.
Ho, born in the Netherlands with Chinese origins, has spent 25 years untangling the contradictions of the Chinese real estate market and challenging western assumptions about the economy of the world’s largest nation.
His latest book, Unmaking China’s Development, argues that the western model of economic development, in which solid institutions such as land registries and impartial civil courts were the foundations on which growth has been built, does not apply to China. Instead, growth has come first, fuelled by rapid urban development, and the institutions have emerged subsequently to meet the new urban middle class’s need for strong ownership rights.
‘China’s current economic development model is very much based on property development, and in particular that by which cheap rural land has been converted into commercial urban land,’ says Ho. ‘Much of that can be done legally, but also quite often in an illicit way, as a result of which a lot of wealth has been generated in China.’
The urban population has been swelled by migration from rural areas after reforms that allowed farmers to sell the lease on their land, he explains. ‘This system allowed farmers to accumulate a certain wealth and as a result, start looking for alternative employment in the cities or the services sector. Millions of farmers started migrating to the cities and finding employment there. But that was only possible because they already had a secure livelihood in the villages.’
DISPUTES AND CORRUPTION
In the absence of any institutions for record keeping and regulation, such as a land registry, ownership rights were poorly defined and insecure, leading to disputes, corruption and speculative buying.
‘In the long term it’s quite necessary that there are changes in China’s property rights structure, but the ambiguity of the system was in no way an impediment to China’s economic development in the past,’ says Ho. ‘That doesn’t mean that it doesn’t need to change because over the long term for stable economic development it needs to change.
But what you see in the Chinese case is that formal and private property rights happen after the boom, rather than as a condition of the boom.’
While real estate has been a major driver of China’s powerhouse economy for four decades, it has also contributed to economic instability in the shape of a construction boom that has outstripped demand. The tangible effect is the emergence of ‘ghost cities’ all over China – suburbs, and in some cases whole cities, where up to 75% of buildings are unoccupied.
But there are also concerns that Chinese companies have chased too many high-risk assets and built up enormous liabilities. ‘There are a lot of worries that these companies have too many bad loans on their books,’ says Ho. ‘If that bubble were to collapse then the consequence would be absolutely severe. It would tear down a lot of state-owned companies, a lot of local government as well, real estate companies, and all that would also affect ordinary citizens in China.
‘So the prospect, or the threat, of this state bubble collapsing is a major reason why the Chinese government has been so forceful in trying to tackle corruption.’
The government’s decision to exercise tighter control not just on Anbang, but on other major insurers including Ping An and New China Life Insurance, is therefore an attempt to anticipate and avoid an economic crisis that would ripple through the Chinese economy and – given its expansion into foreign markets in recent years – have an impact on the global economy.
Some commentators have speculated that the intervention was triggered by fears that Anbang, which claims 1.97 trillion yuan (€254 bn) in assets, was becoming ‘too big to fail’.
Scott Kennedy, director of the Project on Chinese Business & Political Economy at the Center for Strategic and International Studies in Washington, told Reuters: ‘The Chinese government doesn’t want to have a company default on foreign debt.’
Many analysts expect the government to rein in foreign acquisitions such as Vivat, the insurance arm of Dutch bank-insurer group SNS Reaal, bought for €1 in 2015, two years after the group was nationalised to prevent it collapsing under the weight of huge losses on the bank’s real estate lending portfolio.
DIVESTING FOREIGN ASSETS
In July last year, Bloomberg reported that the government had ordered Anbang to start divesting its foreign assets, which also include a €500 mln Dutch office portfolio bought from Blackstone in 2016.
More recently, Dutch media have speculated that Vivat is on the lookout for a new owner, but the company’s official position is that the government takeover of Anbang will have ‘no consequences for the time being’.
Ho does not expect to see any sudden moves by the government to offload its foreign holdings. ‘That would surprise me,’ he says, explaining that the Chinese government wants to minimise foreign stakeholders’ concerns about Chinese takeovers. Ho says the government needs to deflate the real estate bubble carefully through measures such as ordering banks and insurers to make funds available to convert surplus housing into social housing, underwritten by government loans.
In the long term, credible institutions, such as a land registry, need to emerge to ensure clear property rights, efficient record keeping and the means to settle disputes, as well as a property tax which would ‘take away local governments’ incentive to rely too heavily on the income through the land conveyance fee from the sale of land’.
However, Ho says it is vital to tailor reform to reflect regional differences in what is a vast and diverse country. ‘For the more wealthy regions like Shanghai or Guangzhou or Beijing, formalisation of property rights and clarification of property rights would probably work much better. But when you’re looking at the poorer inland regions, you have to be really, really careful and it might be better to postpone formalisation rather than push it through.’
Western commentators tend to make the mistake of taking a ‘snapshot’ of China’s economy rather than studying developments over the long term, says Ho. ‘A typical example in this respect is the notion that China has gone through economic reforms, but no political reforms at all. However, if we look back over the past 30 years, we see that the roles of the National People’s Congress and the Supreme People’s Court have changed dramatically. The separation of powers is much more distinct than it was 30 years ago.’
Commenting on the proposed step, since approved, facilitating lifelong presidency for the current incumbent, Xi Jinping, Ho said: 'The change in the term of the president will only be accepted as long as he can control the economy, but over time, the more fundamental institutional changes that have taken root in the Chinese economy and society will not be easy to reverse.'
Ho points out that Xi has taken major steps to combat corruption, but China’s – and the world’s – stability depends on the government maintaining control of the economy. ‘If Xi fails, we have a major problem,’ he adds. ‘It’s against this very paradoxical and contested background that we need to understand the recent changes.’
Unmaking China's Development: The Function and Credibility of Institutions, by Peter Ho, is published by Cambridge University Press
